How can I invest £500 a month to aim for a second annual income of £27,720

Investing regularly in the stock market can be a great way to earn a second income. Over a long enough period of time, the results can be extremely satisfying.

20 years ago, the FTSE 100 it returned 6.89% per year on average. That's enough to turn a £500 monthly investment into something generating £2,310 a month.

Diversity

One of my favorite things about regular investing is that it avoids a difficult problem. The problem is about diversity.

On the other hand, I want a diversified portfolio. Having shares in companies in different sectors and locations helps to limit the effect of a potential problem in any of them.

Equally, however, I don't like to buy shares in a company just because of what it does or where it is located. I would much rather focus on the best opportunities available to me.

Regular investing solves this problem because opportunities will come and go over time. So I would focus on one or two stocks this month because other things might be better in the future.

Investing for the long term

The point of investing for the next 30 years is that I can give the stocks I buy today time to improve. And that allows me to consider opportunities that I can't see in the short term.

A diploma (LSE:DPLM) is a good example. The business has been growing admirably and I think its future prospects look very good.

This company is a distributor of industrial parts. And while some of the markets it sells to may be cyclical, the company itself enjoys stable demand.

This is because Diploma focuses on products that are inexpensive, but very valuable. As a result, customers are less likely to avoid buying them even if the budget is tight.

Outlook

Diploma's growth strategy is built around buying other businesses and growing them. This can include increasing sales by expanding into new markets, or expanding margins by cutting costs.

The company has many of my sights set on a quality investment. Over the past 10 years, it has retained approximately 44% of its earnings and reinvested this to fuel future growth.

By doing so, Diploma has been maintaining a return on equity of over 15%. That means that the investment made by the company generates a good return on the capital invested.

How long the organization can continue to do this is a big question. But with a market value of £6bn, I think it will be a long time until the buying opportunities start to run out.

Investment benefits

To turn £500 a month into something that produces £27,720 a year requires 30 years of returns in line with the historical performance of the FTSE 100. That is not guaranteed in any way.

To give myself a chance, I would look to focus on high-quality companies with long-term growth prospects. And the long-term approach gives me the opportunity to consider businesses like Diploma.

Based on its current price, the stock looks expensive. But since it is likely to grow in the next three decades, there is an opportunity to consider it for the long term.